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A moral case for free trade?

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Among criticisms of pending Free Trade Agreements is the charge that such deals are structured in ways that keep the poor from improving their lot.

Among criticisms of pending Free Trade Agreements is the charge that such deals are structured in ways that keep the poor from improving their lot. In a piece at The American Interest, economist Jagdish Bhagwati throws some cold water on such claims.

In fact, Bhagwati says a moral case can be made on behalf of free trade.

“Contrary to what skeptics often assert, the case for free trade is robust,” writes Bhagwati.

Further, he notes, “the dramatic upturn in GDP growth rates in India and China after they turned strongly towards dismantling trade barriers in the late 1980’s and early 1990’s. In both countries, the decision to reverse protectionist policies was not the only reform undertaken, but it was an important component.”

In India “the shift to accelerated growth after reforms that included trade liberalization has pulled nearly 200 million people out of poverty. In China, which grew faster, it is estimated that more than 300 million people have moved above the poverty line since the start of reforms.”

Bhagwati claims “If freer trade reduces poverty, it is presumptuous for the critics to claim greater virtue. In truth, the free traders control the moral high ground: with at least a billion people still living in poverty, what greater moral imperative do we have than to reduce that number? Talk about ‘social justice’ is intoxicating, but actually doing something about it is difficult. Here the free traders have a distinct edge.”

 

Discuss this Blog Entry 1

Hugh Campbell (not verified)
on Jul 22, 2011

The De-coupling of Free Trade and U.S. Competitiveness

In Chapter 19 of the 1817 classic On the Principles of Political Economy, and Taxation, David Ricardo mentions , in addition to war, removal of capital and a new tax as destroyers of the comparative advantage which a country before possessed in manufacturing. Administrations/Congresses of both parties have been unable and/or unwilling to connect-the-dots, between the declines in U. S. Global Competitiveness and the following changes since the 1990’s:

- That has the effect of a new tax on U.S Exports, namely China’s manipulation of the U.S. Dollar.

- A Change in U.S. Corporate Tax Regulations that led to the flight of capital from the United States.

- Enactment of Value Added Taxes (VAT), which tax U.S. exports, by an increasing number of our trading partners.

The first change, which dates back to 1995, is China's pegging its currency to the U.S. Dollar, in form this is not a tax, but in substance acts as a tax on all U.S. exports to all U.S. Trading partners, not just exports to China. Since China's economy has been growing multiple times faster the U.S economy, without China's manipulation of the Dollar, there would downward pressure on the Dollar and upward pressure on China's currency. The peg keeps the Dollars from declining as much as market forces would warrant and therefore results in an overvaluation of the Dollar. This overvaluation has the same effect as a tax on all U.S. exports. During the most recent “China U.S. Dollar Peg”, namely from July 2008 Through June 2010, total U.S. Exports were $3.508 trillion with exports to China being $145 billion. An over-valued Dollar was almost 14.9 times more damaging to U.S. exports than if the Renminbi was only kept undervalued. Until action is taken on Buffett’s or a similar balanced trade model, America will continue to squander time, treasure and talent in pursuit of an illusionary recovery.

The second is a change in U.S. Corporate Tax Regulations, dating back to 1997, which began allowing U.S. Corporation the deferral of payment of tax for foreign earnings, as long as those earnings were not returned to the United State. The result is not only the loss of U.S. tax revenue but also an incentive for the remove of capital and with capital the related jobs.

The third change is the significant increase in the number of U.S. Trading partners that have enacted Value-added taxes and dramatic increase in the dollar volume of U.S. exports subject to VATs. In 1990 U.S. exports were subject to consumption taxes levied by about 45 U.S. Trading partners but by 2010 by all but about 20 U.S. trading partners levied their consumption taxes, averaging 17%, on over $ 1.280 trillion of U.S. exports. The United States Government levies no Federal consumption tax on the over $ 1.948 trillion of exports into the U.S.

The unresponsiveness of U.S. Political leaders to these changes that David Ricardo, the father of classical political economics, warned; has subject U.S. businesses and workers to a similar plight as the frog in the boiling water parable. Other relevant warnings follow:

“It is not the strongest species that survives, or the most intelligent but the most responsive to change”
- Charles Darwin

“It is not necessary to change…survival is not mandatory”
- W. Edwards Deming

“The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to ‘political turmoil.’ Pretty soon, I think there will be a big adjustment.”
- Warren Buffett, January 2006

A commonality possessed by Ricardo, Darwin, Deming and Buffett is their ability to be system thinkers and therefore dots-connectors. Our political leaders’ lack of system thinking is the learning disability that must be overcome to restore the United States to its former greatness.

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